CFPB begins auditing post-secondary schools that loan direct to students | Ballard Spahr LLP

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The CFPB has announced that it will begin examining post-secondary schools, such as for-profit colleges, that make private loans directly to students and/or parents to fund elementary, college and other forms of post-secondary education. The announcement was accompanied by the issuance of the CFPB an update to the Manual on Educational Loan Appraisal Procedures. The update includes a new section on loans made by schools directly to students and/or parents, referred to in the handbook as ‘institutional loans’.“ although it can actually be an installment purchase transaction.

The Dodd-Frank Act gave the CFPB the power to oversee private educational loan companies. It also gave the CFPB the oversight authority over the administration of student loans by large banks. In 2013, the CFPB enacted a “major participant rule,” allowing it to oversee any non-bank servicer of government or private student loans if the servicer’s account size, as defined in the rule, exceeds one million accounts.

According to the CFPB press release, the decision to begin testing schools that issue direct credit stems from “concern” by the CFPB[] about the borrower’s experience of institutional lending due to past abuses at schools such as those operated by Corinthians and ITT, where students faced high interest rates and severe debt collection practices.” The CFPB notes that “[s]Schools have historically not been subject to the same mentoring and lending oversight as traditional lenders.”

The update is intended to require CFPB examiners to “in addition to considering general lending issues [to] Review the facts on specific actions only schools can take against their students.” Specifically, the update adds a new section titled “Additional Concerns for Institutional Lenders,” directing auditors to determine the following when auditing schools :

  • Whether the school charges fees and tuition associated with the loan product, and if so, charges these items under the terms of the program in which the borrower participates
  • Whether the school credits account transactions correctly and in a timely manner, including calculations of account balances after the distribution or return of aids
  • Whether the school uses payment plans or temporary credits for all or part of its programs
  • How the school calculates and issues refunds to borrowers who drop out of the school or a program before completing the program or semester for which the loans were taken
  • Whether and under what circumstances the school withholds transcripts or otherwise refuses to certify program completion for students who are in debt
  • Whether and under what circumstances the school imposes enrollment restrictions on institutional borrowers based on their repayment status
  • Whether and under what circumstances the school will charge additional fees or increase tuition from institutional borrowers based on their repayment status
  • Whether the school uses acceleration clauses with its institutional loans in situations where a borrower withdrawing from the school or a program owes more than the proportionate cost of the time they were enrolled in the program (and if the school such clauses used to change school policies to the point of repaying unused federal funds for similar programs)
  • Whether a loan product is a private educational loan within the meaning of Regulation Z and, if so, whether the school complies with the TILA prepayment penalty ban on such loans

The press release includes a reference to “kickback agreements that gave schools incentives to steer students toward certain credits” heeded by regulators in the mid-2000s and includes “maintaining improper credit relationships” as one of the issues which the CFPB examiners will deal with when examining schools. However, this is not a new question for CFPB examiners. Prior to the update, the handbook already instructed examiners to determine whether a lender that originates private student loans “has entered into a partnership, referral relationship, or preferred lender agreement with an educational institution with respect to the [lender’s] private student loan programs” and, where appropriate, to make certain assessments.

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